News / ILAs: radical change, but the fairest way to buy air freight capacity, says Qatar

Qatar Airways Cargo has put itself at the forefront of a potentially radical change in the way air freight capacity is bought. 

It is the first carrier looking to use index-linked agreements (ILAs) with customers, a method likely to take off in large, but capacity-constrained markets, and which will “bring fairness and transparency to pricing”, giving airlines the ability to compete on issues other than rates. 

“ILAs … represent innovation for the industry and, as a company, our goal is to always stay ahead of the competition when it comes to improvement for our customers,” said Guillaume Halleux, chief officer cargo for Qatar. 

“Overall, rate transparency will increase, giving a clear reference of what a fair rate can be, which would then improve the overall efficiency of business transactions,” he told The Loadstar. 

“On the airline side, for example, we expect it to reinforce the added value of operational reliability and of being able to deploy capacity in an agile way, in comparison to being the lowest quote in a procurement exercise.  

“Our capacity and fleet is growing and this kind of agility is, coincidentally, one of our strengths.” 

ILAs are a procedure by which a contract includes a periodic adjustment to the prices paid for the contract, based on the level of a nominated price index. Since the launch of the TAC, there is now a reliable air freight price index, enabling the use of ILAs. 

The spot rate market is systemically volatile, explained Peter Stallion of Freight Investor Services. “Rates are spread between different airlines and different routes, which makes volatility inherent in the market. No one knows what everyone else is doing; it’s only since we’ve been able to observe it that we can see what the market does.” 

Using ILAs creates a fair and transparent way of ensuring the correct price is paid – although not every player seeks transparency, said Mr Stallion.

“The top 10 forwarders want someone else to be the first entrant. Most airlines are on board – but not all. Some know they benefit from keeping rates as a bilateral discussion, where it is not transparent to the market. But with more indices, the market is going towards that – you can’t fight it for long.” 

But there is already interest, noted Mr Halleux. 

“Customers are very interested in knowing more about the initiative, and generally recognise that the index in relevant markets replicates market fluctuation. 

“It is a bit early to make any real prediction, but the ILAs seem to best work on large, yet capacity-constrained markets, such as Hong Kong, mainland China and Germany, to name a few.  

“This is because of the mathematical requirement to have large amounts of data in order to produce a statistically relevant index. Capacity-constrained, because in such markets, traditional rate negotiation is more complex and less efficient due to the business requirement for every customer to secure a certain amount of capacity on the market. This means suppliers also have a fair bargaining power.  

“In those markets, when the customer discloses his capacity requirement, he will generally lose some flexibility on the rate. But if he or she has a specific rate target, capacity might not be available.  

“An ILA represents an efficient alternative to that problem, because it simplifies the discussion into a predominantly capacity discussion. We can imagine a future in which ILAs are a mainstream solution for those markets, but traditional rate-setting would still be expected to prevail in thinner tradelanes or for project cargo.” 

Qatar is running tests at the moment, looking at the indices available, the frequency of refreshes and the relative position to that index.

“This means we could complete it very quickly, but that is all depending on the customer’s preference.”  

Freight Investor Services is looking to the next step, to launch an air freight derivatives market, but Mr Halleux thinks this could be some way off. 

“We have certainly met people who think that is the next step. The reality is that the implementation is slower and the first step is paper contracts. ILAs have already been a few years in the making. So we will take it one step at a time.”